Wesfarmers Limited Porter Five Forces Analysis

Strategic Management Essays, Term Papers & Presentations

Porter Five (5) Forces Analysis is a strategic management tool to analyze industry and understand the underlying levers of profitability in an industry. Wesfarmers Limited managers can use Porter Five Forces to understand how the five competitive forces influence profitability and develop a strategy for enhancing Wesfarmers Limited competitive advantage and long term profitability in Food & Staples Retailing industry.

Brief overview of Wesfarmers Limited

Wesfarmers Limited is one of the leading Australian firms in the Food & Staples Retailing sector. Over the years Wesfarmers Limited has redefined the ways of doing business in Food & Staples Retailing industry. Wesfarmers Limited is listed on the Australian Securities Exchange (ASX) and have the stock market ticker " WES ".

What are Porter Five (5) Forces

In his revolutionary article in Harvard Business Review (HBR) - "Five Forces that Shape Strategy", Michael Porter observed the five forces that have significant impact on a firm's profitability in the industry it operates in. The Porter Five (5) Forces are -

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat from Substitute Products

Rivalry among the existing players.

Porter Five Forces is a holistic strategy framework that took strategic decision away from just analyzing the present competition. Porter Five Forces focuses on - how Wesfarmers Limited can build a sustainable competitive advantage in Food & Staples Retailing industry. Managers at Wesfarmers Limited can not only use Porter Five Forces to develop a strategic position with in Food & Staples Retailing industry but also can explore profitable opportunities in whole Food & Staples Retailing sector.

Threats of New Entrants

New entrants in Food & Staples Retailing brings innovation, new ways of doing things and put pressure on Wesfarmers Limited through lower pricing strategy, reducing costs, and providing new value propositions to the customers. Wesfarmers Limited has to manage all these challenges and build effective barriers to safeguard its competitive edge.

How Wesfarmers Limited can tackle the Threats of New Entrants

By innovating new products and services. New products not only brings new customers to the fold but also give old customer a reason to buy Wesfarmers Limited ‘s products.

By building economies of scale so that it can lower the fixed cost per unit.

Building capacities and spending money on research and development. New entrants are less likely to enter a dynamic industry where the established players such as Wesfarmers Limited keep defining the standards regularly. It significantly reduces the window of extraordinary profits for the new firms thus discourage new players in the industry.

Bargaining Power of Suppliers

All most all the companies in the Food & Staples Retailing industry buy their raw material from numerous suppliers. Suppliers in dominant position can decrease the margins Wesfarmers Limited can earn in the market. Powerful suppliers in Food & Staples Retailing sector use their negotiating power to extract higher prices from the firms in Food & Staples Retailing field. The overall impact of higher supplier bargaining power is that it lowers the overall profitability of Food & Staples Retailing.

How Wesfarmers Limited can tackle Bargaining Power of the Suppliers

By building efficient supply chain with multiple suppliers.

By experimenting with product designs using different materials so that if the prices go up of one raw material then company can shift to another.

Developing dedicated suppliers whose business depends upon the firm. One of the lessons Wesfarmers Limited can learn from Wal-Mart and Nike is how these companies developed third party manufacturers whose business solely depends on them thus creating a scenario where these third party manufacturers have significantly less bargaining power compare to Wal-Mart and Nike.

Bargaining Power of Buyers

Buyers are often a demanding lot. They want to buy the best offerings available by paying the minimum price as possible. This put pressure on Wesfarmers Limited profitability in the long run. The smaller and more powerful the customer base is of Wesfarmers Limited the higher the bargaining power of the customers and higher their ability to seek increasing discounts and offers.

How Wesfarmers Limited can tackle the Bargaining Power of Buyers

By building a large base of customers. This will be helpful in two ways. It will reduce the bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its sales and production process.

By rapidly innovating new products. Customers often seek discounts and offerings on established products so if Wesfarmers Limited keep on coming up with new products then it can limit the bargaining power of buyers.

New products will also reduce the defection of existing customers of Wesfarmers Limited to its competitors.

Threats of Substitute Products or Services

When a new product or service meets a similar customer needs in different ways, industry profitability suffers. For example services like Dropbox and Google Drive are substitute to storage hardware drives. The threat of a substitute product or service is high if it offers a value proposition that is uniquely different from present offerings of the industry.

How Wesfarmers Limited can tackle the Treat of Substitute Products / Services

By being service oriented rather than just product oriented.

By understanding the core need of the customer rather than what the customer is buying.

By increasing the switching cost for the customers.

Rivalry among the Existing Competitors

If the rivalry among the existing players in an industry is intense then it will drive down prices and decrease the overall profitability of the industry. Wesfarmers Limited operates in a very competitive Food & Staples Retailing industry. This competition does take toll on the overall long term profitability of the organization.

Collaborating with competitors to increase the market size rather than just competing for small market.

Implications of Porter Five Forces on Wesfarmers Limited

By analyzing all the five competitive forces Wesfarmers Limited strategists can gain a complete picture of what impacts the profitability of the organization in Food & Staples Retailing industry. They can identify game changing trends early on and can swiftly respond to exploit the emerging opportunity. By understanding the Porter Five Forces in great detail Wesfarmers Limited 's managers can shape those forces in their favor.